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Ask HN: paying rent and bootstrapping - what alternatives are there?

Hi everyone, I run a company with a core product that is bootstrapped and a bit more than ramen-profitable. We are a small fish in a big market. Our customers love us, but business is growing slowly since other players dominate distribution channels and we are only slowly starting to change that. I've thought about taking investment to try and grow faster, but it doesn't seem like a great move without a solid plan for converting cash into revenue. And I'm concerned that the need to return multiples on any investment would screw our existing business if we weren't able to push beyond slow organic growth. So current strategy is pouring all income back into the company and trying to grow existing and new product lines with the cash we have. In short: more bootstrapping. Here's the rub: I'm running this business from a rented apartment that is large enough to host the people I have who come over at times and has certain kinds of other dedicated space necessary for the business. I sleep in a room in the back so it doubles as an apartment. There aren't zoning problems with any of this, but paying rent every month grates. Surely there's a better way. I've started wondering if it would make sense to look for investment to buy a place and pledge the property as collateral to the investor? That would free up cash on our side, and reduce the downside risk to any investor. Sort of like dealing with a bank, only without the bank, and with an equity stake or convertible loan taking the place of what would be the interest payment. Has anyone gone down this road for purchasing housing or other fixed assets? As a bootstrapped startup? I've never heard of anyone doing anything like this and don't know if that's because it's a patently stupid idea, because it isn't a common growth scenario, because the market is covered by existing mortgage products, or because angels are generally disinterested in this sort of thing. How off the wall is the idea and are there any better ones? How do I stop paying rent, or at least get a better deal for it?

JacobAldridge 17y ago
One option may be to consider what sounds like multiple needs (a place to host people, dedicated business space, a space to sleep) and see if separating those allows you to spend less on rent. For the bought property to cost you less than renting (making generalisations about the area you live in, interest rates etc) the Investor would probably need to stump up a sizable chunk of cash into the property. Most property investors (myself included) are mindful that equity growth in real estate, when it happens, is normally only a few % points above inflation - it's profitable because you leverage a bank's money - you only put in a small amount of cash, so those few % points are pretty good against your investment. A simple example that clearly ignores interest costs, maintenance etc I put 10% ($30K) into a $300K apartment, and owe a bank $270K. The market grows by 5%, so the apartment is now worth $315K but I still only owe the bank $270K so my $30K has grown to $45K a 50% return. Now if you need an investor to put in a sizeable chunk, that equation will be different. I put 40% ($120K) into the same $300K apartment. After the growth of 5%, my $120K is worth $135K. That's a 12.5% return. At the upper extreme, if I invest 100% of the property my growth is 5% - better than bank interest in the US at the moment, but only just. Not an attractive deal (and I still haven't factored in interest and other cashflow costs). So that's my response to your out-of-the-box idea - for it to help you (by reducing or removing rent / mortgage costs) it probably won't be attractive to an investor (smaller returns than more diversified investment). Happy to be proved wrong, and different investors do have different needs!
- tiredofrenting 17y ago
  > Most property investors (myself included) are mindful that equity > growth in real estate, when it happens, is normally only a few % > points above inflation - it's profitable because you leverage a > bank's money - you only put in a small amount of cash, so those few > % points are pretty good against your investment. Appreciate the reply. Very useful to read how you calculate your ROI when making real estate investments.
nobody_nowhere 17y ago
It sounds like you have two separate problems: 1. Your company is growing slowly, and you don't know how to accelerate the growth. 2. You live in your office and don't have a way to change the situation. Approach the issues separately. It's hard to get into specifics on either one without knowing more. Could you move the company out of your apartment by finding cheap shared office space? Could you find a roommate situation to exact yourself at the same time? Can you just bite the bullet and get a mortgage? For the first one, it sounds like you're not confident in your ability to grow due to larger competitors. How long do you want to bootstrap for? Sit back and figure out how to make a bigger move. Ask people you trust for help. Ask them to refer you to people they trust and find thoughtful. Look at your market from a different angle. Look at different markets. Make a plan that you believe in and use it to get investment. Don't be afraid of money. It's going to be tough to explain to someone why investing in real estate for you is better than investing in real estate just for themselves. Tackle the issues separately.
- tiredofrenting 17y ago
  Thanks for the reply. More revenue solves problems. I think the core problem isn't growth though. It's the expectation of a really high rate of return on angel investment. I was really wondering if taking investment for fixed asset purchasing was typically done. From the general silence, it sounds as if taking out a mortgage would be the most practical thing to do. I appreciate the consideration put into the reply. Food for thought, especially in the second last paragraph.
  - nobody_nowhere 17y ago
    The angels I've met are looking for stratospheric upside when there's high risk. Proven, ongoing revenue puts you in the driver's seat. You've cut the risk of an investment dramatically relative to a buying into a couple of 22 year old guys with just a wacky idea that has a minuscule chance of a 100,000% return. You need a different kind of investor than the ones who are playing startup roulette. They're out there. There's a lot of money looking for a new home.

JacobAldridge 17y ago

One option may be to consider what sounds like multiple needs (a place to host people, dedicated business space, a space to sleep) and see if separating those allows you to spend less on rent. For the bought property to cost you less than renting (making generalisations about the area you live in, interest rates etc) the Investor would probably need to stump up a sizable chunk of cash into the property. Most property investors (myself included) are mindful that equity growth in real estate, when it happens, is normally only a few % points above inflation - it's profitable because you leverage a bank's money - you only put in a small amount of cash, so those few % points are pretty good against your investment. A simple example that clearly ignores interest costs, maintenance etc I put 10% ($30K) into a $300K apartment, and owe a bank $270K. The market grows by 5%, so the apartment is now worth $315K but I still only owe the bank $270K so my $30K has grown to $45K a 50% return. Now if you need an investor to put in a sizeable chunk, that equation will be different. I put 40% ($120K) into the same $300K apartment. After the growth of 5%, my $120K is worth $135K. That's a 12.5% return. At the upper extreme, if I invest 100% of the property my growth is 5% - better than bank interest in the US at the moment, but only just. Not an attractive deal (and I still haven't factored in interest and other cashflow costs). So that's my response to your out-of-the-box idea - for it to help you (by reducing or removing rent / mortgage costs) it probably won't be attractive to an investor (smaller returns than more diversified investment). Happy to be proved wrong, and different investors do have different needs!

tiredofrenting 17y ago
> Most property investors (myself included) are mindful that equity > growth in real estate, when it happens, is normally only a few % > points above inflation - it's profitable because you leverage a > bank's money - you only put in a small amount of cash, so those few > % points are pretty good against your investment. Appreciate the reply. Very useful to read how you calculate your ROI when making real estate investments.

nobody_nowhere 17y ago

It sounds like you have two separate problems: 1. Your company is growing slowly, and you don't know how to accelerate the growth. 2. You live in your office and don't have a way to change the situation. Approach the issues separately. It's hard to get into specifics on either one without knowing more. Could you move the company out of your apartment by finding cheap shared office space? Could you find a roommate situation to exact yourself at the same time? Can you just bite the bullet and get a mortgage? For the first one, it sounds like you're not confident in your ability to grow due to larger competitors. How long do you want to bootstrap for? Sit back and figure out how to make a bigger move. Ask people you trust for help. Ask them to refer you to people they trust and find thoughtful. Look at your market from a different angle. Look at different markets. Make a plan that you believe in and use it to get investment. Don't be afraid of money. It's going to be tough to explain to someone why investing in real estate for you is better than investing in real estate just for themselves. Tackle the issues separately.

tiredofrenting 17y ago
Thanks for the reply. More revenue solves problems. I think the core problem isn't growth though. It's the expectation of a really high rate of return on angel investment. I was really wondering if taking investment for fixed asset purchasing was typically done. From the general silence, it sounds as if taking out a mortgage would be the most practical thing to do. I appreciate the consideration put into the reply. Food for thought, especially in the second last paragraph.
- nobody_nowhere 17y ago
  The angels I've met are looking for stratospheric upside when there's high risk. Proven, ongoing revenue puts you in the driver's seat. You've cut the risk of an investment dramatically relative to a buying into a couple of 22 year old guys with just a wacky idea that has a minuscule chance of a 100,000% return. You need a different kind of investor than the ones who are playing startup roulette. They're out there. There's a lot of money looking for a new home.